Streaming video game service OnLive laid off most of its staff and sold itself to an unnamed buyer late Friday, in what appears to be a move to keep the service from going out of business.

While OnLive did not file for bankruptcy, the wording of the company's announcement -- saying it had been acquired into "newly-formed company" and "backed by substantial funding" -- indicated that OnLive was struggling to stay in business as a stand-alone company.

The drama surrounding OnLive started Friday afternoon with a series of blog posts saying that the company had laid off its entire staff and shut down. OnLive's spokesman pushed back against the reports, saying "we don't respond to rumors, but of course not."

By the evening, though, it was clear something was afoot. IDG News reporter Martyn Williams staked out OnLive's Palo Alto, Calif., headquarters. "In the last 20 mins have seen three people walk out of OnLive with leaving boxes," Martyn tweeted.

OnLive said late Friday that many of its assets have been acquired by a new owner, and that the company will transition to a "new form." It added that the new company plans to re-hire "a large percentage" of OnLive's laid-off staff, and that its services will continue uninterrupted for customers.

But OnLive's original vision may no longer be a fit for the fast-changing gaming field.

OnLive was revealed with great pomp and circumstance in 2009, promising to revolutionize the way publishers and players would produce and consume video game content. Instead of selling physical goods, like the retail juggernaught GameStop(GME), OnLive would run a copy of a publisher's title from a server at one of the company's datacenters. Then customers would pay a licensing fee to play an on-demand version of the game.

Streaming meant that publishers could patch their games instantly and could save on the packaging and sale of their goods. Several publishers jumped on the service, including well-known franchises such as Ubisoft's "Assassin's Creed," and Take-Two's "LA Noire" and "BioShock."

But the service struggled to keep up the momentum. Big, first-person shooters such as "Battlefield" and "Call of Duty" weren't available on OnLive because of concerns about the service's latency. Latency, or the time it takes for content to go from a datacenter to a customer's computer and back again, is critical for games where decisions are made in fractions of a second.

The company also struggled to find the right business model for its service. OnLive originally launched with a subscription fee, but abandoned it months later when it realized that gamers weren't willing to pay a monthly fee on top of paying full price for each game title.

As time went on, publishers began to set up their own, rival services. Electronic Arts(EA) created Origin; Ubisoft(UBSFF) launched U-Play; and Valve's Steam service became the dominant way to sell and distribute PC games.

"I think publishers saw OnLive and had memories of what the music industry did with MTV," says Robert Levitan, CEO of Pando Networks, a cloud content delivery network. "Why license out your content to a third-party distribution site when you can do it on your own?"

At the 2010 E3 video gaming convention, OnLive founder and CEO Steve Perlman admitted that streaming was still an evolving technology, but he felt the costs and latency issues would quickly diminish.

To Perlman's credit, streaming has come a long way since then. Netflix(NFLX) now does HD streaming, and casual games made by developers like Zynga are streamed to consumers' personal computers. Sony(SNE) purchased cloud-based gaming service Gaikai last month for $380 million, which some thought was a sign that OnLive would be bought as well.

Still, many in the industry think that the technology to afforadbly stream high-production titles isn't ready yet.

"OnLive may be the future, but the future is not here today," Levitan says.